As my friend Tadas Viskanta emphasizes in his terrific book, Abnormal Returns, investing is hard. I have been travelling this week (I’m speaking at a conference here in NYC tomorrow) and I have been thinking a lot about that statement and the concept it represents. It’s not that I doubt it’s true. Indeed, I think investing is really hard. But I have been challenging myself to explain why succinctly and clearly. So here goes, via George Costanza.
We have all heard (or at least heard about) the It’s not you, it’s me break-up excuse. In investing, as much as we’d like to think otherwise, it really isn’t you and it really is me (with the “me” being each investor). Our human make-up and frailties conspire to make investing really hard for us. To put a bit of meat on those bones…
1. We want immediate gratification, which makes it hard to save and to live frugally. It also makes it hard to invest — which is by its nature a long-term endeavor. We want to win the lottery and to win it now — not in increments over time with many bumps (and some serious problems) along the way.
2. We do a pretty good job finding correlation but causation is a very difficult concept for us. We have a hard time differentiating noise and signal.
3. Our behavioral biases (e.g., confirmation bias, overconfidence bias, etc.) work against us at nearly every turn.
4. Investing is a probabilistic endeavor and we have trouble thinking in those terms. We want certainty — a direct if/then relationship. We simply aren’t comfortable with a terrific process if it yields poor results a significant portion of the time.
5. Our over-arching problem is the bias blind-spot. Even when we recognize our foibles, weaknesses and biases, we tend to think that they apply to others and not to ourselves.
Yikes. The truth can hurt. It’s not you, it’s me.